Bitcoin, Blockchain Technology & Virtual Currency Update

The long anticipated BitLicense regulations have arrived from the New York State Department of Financial Services (NYDFS). This is the first robust regulatory framework for companies wishing to operate in the virtual currency space. Some believe this marks a legitimization of virtual currency, and others believe this could be the thing that kills innovation surrounding virtual currency. Either way, companies that wish to engage in any “Virtual Currency Business Activity” in New York will have to get a BitLicense. The regulation defines Virtual Currency Business Activity as:

…the conduct of any one of the following types of activities involving New York or a New York Resident:

  1. receiving Virtual Currency for Transmission or Transmitting Virtual Currency, except where the transaction is undertaken for non-financial purposes and does not involve the transfer of more than a nominal amount of Virtual Currency;
  2. storing, holding, or maintaining custody or control of Virtual Currency on behalf of others;
  3. buying and selling Virtual Currency as a customer business;
  4. performing Exchange Services as a customer business; or
  5. controlling, administering, or issuing a Virtual Currency.

The development and dissemination of software in and of itself does not constitute Virtual Currency Business Activity.

Some of the requirements of these companies include:

  • A cybersecurity program
  • A qualified Chief Information Security Officer
  • Appropriate consumer protection policies and procedures
  • Certain capital requirements
  • Anti-money laundering (AML) requirements
  • Office of Foreign Assets Control (OFAC) compliance
  • Reporting of transactions more than $10,000
  • Suspicious Activity Reports (SARs)
  • Annual audits

These regulations could potentially have a domino effect on other jurisdictions, so it will be interesting to see over the next several months and years how other jurisdictions respond. The regulations are detailed in the 44-page document on the NYDFS website.

Other notable recent events, which suggest virtual currencies and their underlying technology may be more than just a passing fad, include:

  • The New York Stock Exchange invested in the Bitcoin company Coinbase, which has now raised more than $106 million from investors. (http://goo.gl/zazPI6)
  • The first US Bitcoin exchange, Coinbase Exchange, opened its doors. (http://goo.gl/Ibr55i)
  • The first publicly traded Bitcoin Fund, the Bitcoin Investment Trust (GBTC on OTCQX), began trading. (https://goo.gl/ewf6kJ)
  • $116 million was invested into Bitcoin startup 21 Inc. (http://goo.gl/bWWPMR)

What I find most interesting, however, is that companies are beginning to leverage virtual currencies to do some creative, productive things.

For example, Factom has created a system that allows users to store large amounts of data on their system and then prove that data was not changed after it was uploaded. Unlike the data stored on the Bitcoin blockchain—the publicly visible shared database of all transactions that have ever occurred on the Bitcoin network—the Factom data is not necessarily publicly visible. It’s only visible to those whom the data owner grants access, which could range from a company’s private data only visible to certain employees all the way up to publicly visible property records. While this data isn’t stored on the blockchain, it does rely on and anchors to the blockchain in the following manner. Factom bundles a specific set of data together and produces a hash of that data, which can be thought of as a unique identifier that only can be reproduced from that exact data. It then records that hash into the blockchain. That way, anybody who views that data can verify it hasn’t been altered since it was initially recorded by comparing the hash of the data they’re reviewing with the hash that was permanently time stamped and recorded onto the blockchain. The end result is a bit like the service a county recorder’s office provides.

From a fraud investigator’s perspective, this could be a great tool in fraud investigations, as any alterations would readily be detectable. This also is great news from a data analytics perspective, as this will encourage data that’s currently siloed and—in some cases—only in hard copy form, such as property records in certain counties, to be digitized and publicized, which means fresh data to analyze!

It’s an exciting time for technology enthusiasts, and hopefully we are nearing a time when the utility and efficiencies of these technologies can be realized in our everyday lives.

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Tom is a senior managing consultant with BKD’s Forensics & Valuation Services team. He has provided fraud investigation, litigation support, computer forensics, data mining and business valuation services. His experience includes managing large forensic accounting, fraud investigation and data mining projects.

Tom Haldiman – who has written posts on BKD Forensics.


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